What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Zhejiang XCC GroupLtd (SHSE:603667), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Zhejiang XCC GroupLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥96m ÷ (CN¥4.8b - CN¥1.5b) (Based on the trailing twelve months to September 2023).
Therefore, Zhejiang XCC GroupLtd has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 6.2%.
View our latest analysis for Zhejiang XCC GroupLtd
In the above chart we have measured Zhejiang XCC GroupLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Zhejiang XCC GroupLtd.
The Trend Of ROCE
Unfortunately, the trend isn't great with ROCE falling from 9.4% five years ago, while capital employed has grown 132%. That being said, Zhejiang XCC GroupLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Zhejiang XCC GroupLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
Our Take On Zhejiang XCC GroupLtd's ROCE
Bringing it all together, while we're somewhat encouraged by Zhejiang XCC GroupLtd's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 199% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
One more thing: We've identified 4 warning signs with Zhejiang XCC GroupLtd (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.